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Unemployment makes social security solutions imperative in Brazil

Unemployment figures alone don't explain the true extent of the crisis. Photo: Roberto Herrera Peres/Shutterstock Coconut cart. Photo: Kdalsin/Shutterstock

Brazil’s economic scenario was already dire, even before the Covid-19 pandemic hit the country. Any expectations of recovery have firmly been put on hold for the time being. Countries around the world, even those with more robust economies than Brazil’s, are now discussing how to strengthen welfare measures to protect groups who have been hit the hardest by the crisis. As Latin America’s largest economy, Brazil will have to be asking the same questions. 

In November 2019, Brazil reformed its pension system, seeking to ward off a potential default on public accounts for the next few years. But with the economic crisis brought on by the pandemic adding to a further deterioration of the default, the problem might come sooner than expected.

&nbsp;</p> <p>Spiking at the beginning of the Covid-19 crisis, <a href="https://g1.globo.com/economia/noticia/2020/05/28/desemprego-sobe-para-126percent-em-abril-e-atinge-128-milhoes-diz-ibge.ghtml">unemployment figures</a> in Brazil stabilized at 12.3 percent over the third week of June, according to data from the Brazilian Institute of Geography and Statistics (IBGE). But that is no reason for celebration.&nbsp;</p> <p>As shown by <strong>The Brazilian Report</strong>, of the total number of <a href="https://brazilian.report/business/2020/07/06/latin-america-brazil-mexico-face-similar-job-market-woes/">out-of-work Brazilians</a> (75.3 million), around one-quarter have simply stopped looking for jobs altogether, discouraged by the pandemic or a lack of opportunities. While the full extent of the <a href="https://brazilian.report/podcast/2020/04/02/explaining-brazil-podcast-brazil-facing-a-job-apocalypse/">Covid-19 impacts on the job market is still unknown</a>, there is no doubt that Brazilians are in for a tough time ahead, with unemployment and informality set to grow.</p> <p>One of the immediate consequences of a reduction in formal jobs and an increase in unemployment is a fall in government revenues from worker payroll contributions, such as pension fund collection, which is already in default.</p> <p>With fewer former workers contributing, this social security deficit is likely to deepen. A projection by the Brazilian Senate’s Independent Fiscal Institution (IFI) estimates that the deficit of the National Social Security System (INSS) will hit BRL 306.2 billion by the end of the year, up from BRL 213.2 billion in 2019.&nbsp;</p> <figure class="wp-block-image size-large"><img loading="lazy" width="1000" height="667" src="https://brazilian.report/wp-content/uploads/2020/08/shutterstock_1772394863.jpg" alt="Unemployment figures alone don't explain the true extent of the crisis. Photo: Roberto Herrera Peres/Shutterstock" class="wp-image-45802" srcset="https://brazilian.report/wp-content/uploads/2020/08/shutterstock_1772394863.jpg 1000w, https://brazilian.report/wp-content/uploads/2020/08/shutterstock_1772394863-300x200.jpg 300w, https://brazilian.report/wp-content/uploads/2020/08/shutterstock_1772394863-768x512.jpg 768w, https://brazilian.report/wp-content/uploads/2020/08/shutterstock_1772394863-610x407.jpg 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><figcaption>Unemployment figures alone don&#8217;t explain the true extent of the crisis. Photo: Roberto Herrera Peres/Shutterstock</figcaption></figure> <h2>Unemployment creates legion of &#8216;Individual Micro-Entrepreneurs&#8217;</h2> <p>A legacy of the labor reform passed by the government of former President Michel Temer, the tax classification of Individual Micro-Entrepreneurs (MEIs) serves as a halfway house between informality and registered work. MEIs essentially work as their own very small companies, and are hired by way of formal contracts between two legal entities. The mechanism allows workers to pay a lower level of tax, but gives revenue to the state where, in previous circumstances, these workers would potentially be operating in the informal market.</p> <p>There are experts who claim that the MEI system can be used as a tool to mitigate informality and therefore reduce the social security deficit, even if workers are contributing less. But the answer is not so simple.&nbsp;</p> <p>&#8220;We must be clear that the precariousness of the labor market, aggravated by the current crisis, will not be corrected easily. It will depend on the recovery of investment and production&#8221;, says Felipe Salto, executive-director of the IFI, speaking to <strong>The Brazilian Report. </strong>He adds that productivity must be increased to enable the creation of jobs with higher salaries.&nbsp;</p> <p>The debate around the MEI system is an ambiguous one, explains economist Guilherme Mello, from the University of Campinas. While many criticize it for allowing workers to enter formality while paying less taxes, it is also important to ask if, in case it did not exist, that worker would be formalized at all, he explains.</p> <p>Mr. Mello says MEIs should not be taken as a solution to mitigate informality or to address the pension fund deficit, because that is not even its objective. &#8220;What will ensure higher formalization are less tributary regimes, and recovery in the growth of the economy&#8217;s demand,&#8221; he tells <strong>The Brazilian Report.&nbsp;</strong></p> <h2>A need for solutions</h2> <p>For Brazil, even more important than discussing the pension fund deficit, argues Mr. Mello, is thinking up how to use instruments to fund social security in general, in line with the ongoing debate in other countries. &#8220;What is being discussed around the world today, and something that we unfortunately missed when reforming our pension system, are the funding mechanisms for social security in a world where traditional formal jobs are no longer the rule,&#8221; he says.&nbsp;</p> <p>Mr. Mello suggests a potential solution of coupling tax revenue — mostly on income and property — to social security funding. However, the tax reform proposals currently processing in Brazil&#8217;s Senate go nowhere near this issue.&nbsp;&nbsp;</p> <p>Economy Minister Paulo Guedes has argued in favor of taxes on dividends, following international examples, as <a href="https://brazilian.report/business/2020/06/25/tax-free-dividends-make-brazilian-stocks-attractive-but-will-the-party-end/">explained by <strong>The Brazilian Report</strong></a>.&nbsp; His plan includes lowering the current 34 percent tax rate on corporate profits to somewhere around 20 percent — similar to the U.S. — and then charging dividends by an additional 15 percent.</p> <p>&#8220;Social security is an inescapable issue for the coming decades,&#8221; Mr. Mello explains. The debate now is around how the state will fund social protections, which includes pension funds, social welfare, health, and, more recently, universal income. One possible solution lies in an overhaul of the state, focusing on diversifying revenue sources, he says.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

Laís Martins

Laís Martins is a Brazilian journalist pursuing a master's degree in Media and Globalization. Her coverage is focused on politics, human rights, and society. Previously, she worked for Reuters Brasil.

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